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What Happens When We Die with Debt

Most people – about 73% of consumers, to be specific – have at least some debt remaining when they die. When you add up all the personal loans, credit cards and mortgages, the numbers can get pretty high. In fact, according to Experian’s FileOne database of 220 million consumers, the average consumer dies with about $62,000 worth of debt. This same report indicated that the most common type of debt comes from credit cards, followed by mortgage debt, auto loans, personal loans, and finally, student loans.

Does Your Debt Die When You do?

Yes, and no. No one else is technically responsible for your debt when you die, but there are certain situations where it can get complicated. While creditors cannot come after family members for unpaid debts of the deceased, they can come after the borrower’s estate in some cases. As a result, what is left to pass on to heirs can be significantly decreased by outstanding debts.

For example, private student loan companies may collect from a borrower’s estate, while federal student loan debt is typically cancelled upon death. In addition, if part of your debt includes a mortgage for real estate assets with co-owners, then in most cases, the co-owners will be responsible for the remainder of the debt.

Or, maybe you owned a home that your surviving family members live in, but the home must be sold to pay off debts. Not only are you leaving the burden of selling the house to your survivors, but they are also left without a home, or the funds from its sale. As you can see, leaving debt behind when you die can significantly impact your family members.

Ways to Avoid Leaving Debt Behind

Although it’s now always possible, the best thing to do is to make your debt as small as possible, or better yet, non-existent. By paying off as much of your mortgage, credit cards, auto loans, and other personal loans as possible now, you can enjoy financial freedom now, and your family won’t be left with the burden of your debts when you’re gone.

Life insurance is another option to invest in, as it can assist with paying debts that would otherwise be paid with estate assets and funds. It’s especially important to consider life insurance if you have a lot of family members and other people that are dependent upon you for financial support.

Planning Ahead

Estate planning is another great option to ensure that surviving family members are taken care of financially after your death. By working with a professional to legally establish what will be done with your assets when you die, you can take this burden away from family members, and ensure that the state isn’t left to decide what happens.  You can also save your loved ones from the costs that are often associated with having these financial decisions made by the courts.

In addition to drafting a will, and a variety of other end-of-life documents, you can also pre-plan and pre-pay for end-of-life services, such as a funeral, cremation, or other memorial services. This will not only ensure that your final wishes are carried out, but also that there is no financial burden placed upon your loved ones when it comes to paying for the services you’ve requested.

Preplanning your final arrangements ensures that your family understands your final wishes and alleviates a great deal of stress.

What Happens When We Die With Debt - Phaneuf

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